I HOLD THIS TRUTH TO BE SELF-EVIDENT, THAT A DEBT CRISIS CANNOT BE RESOLVED WITH MORE DEBT

Thursday, November 20, 2008

Come Play With Me

With interest rates being slashed by central banks all over the world readers may be interested in trying their hand at MoPoS, or the Monetary Policy Simulation available at Swiss National Bank's site. Yes, you too can be Ben (or Jean-Claude, Jean-Pierre, Mervyn, or whomever catches your gaming fancy).

For your further (pictorial) inducement to attempt wonkish policy behavior in the privacy of your own parlour, here is a chart of the effective Fed Funds rate (0.38% yesterday). Sad to say it is very near the dreaded liquidity trap condition that spells "GAME OUT" in MoPoS, as it also does in real life. Just ask the Japs.

10 comments:

OT: was reading at IRA and they had this note which given your take on the CDS market would be of interest:

NOTHING the Government does will work until they get rid of these nightmares. Letting credit default swaps ("CDS") redefine insolvency as failure to post collateral means systemically critical counterparties such as Lehman Brothers or Bear are certain to fail once they wobble and, even worse, that there will be NOTHING LEFT for traditional creditors (including commercial paper) when they do. This has seized up the money markets, which no longer function without government assistance. This means the Government picks winners and losers, encourages investors NOT to underwrite and incents those "chosen" to sit on the money they can raise and keep credit velocity at zero. As long as CDS exist in bilateral form there is structural uncertainty in what it means to have a balance sheet. For everybody. CDS should be DOA."

Because a credit downgrade is coming for U.S. sovereign debt which will likely happen within a year. in fact, I'd give good odds on it happening by this summer. The prospect of the world's greatest debtor nation facing plunging tax receipts due to an economic collapse of epic (and possibly) unprecedented proportions, will be the proximate cause of the downgrade. When this happens, Uncle Sam will not be able to find the funds to pay for all that he must pay for.

There will be massive cuts in government outlays, rest assured. This has already started at the local level, and most obviously in the private sector. The Federal Government is next. Believe it or not, the American military, with its many bases all over the world, will contract much like our financial infrastructure has, violently and with alarming speed.

But this and other cuts will not be sufficient, not with falling tax receipts and the disappearance of buyers for our downgraded sovereign debt. And so, the authorities will be forced to open Pandora's box, do the unthinkable, and out and out PRINT!

Notice what isn't going down in this latest crash wave in shares. Gold. Yes, it has gone down prior to the latest swoon, falling approximately 30% from its nominal all time high, a mere pittance when one looks at certain sectors of the stock market, and real estate as a whole. But now, the barbarous relic is holding its ground. Pay attention as it is trying to tell you something. Do not listen to the false god that is the U.S. Bond Market which will be the penultimate bubble to burst before Gold goes supernovae. No fiat currency will be safe, going forward, and the dollar the least safe of a doomed species.

Obama is being managed by the same sort of desperate dinosaurs that Carter was. In the case of Volcker, we have an actual relic from the good old days.

I hasten to observe that the U.S. was not a debtor nation when Carter authorized the issue of the aforesaid bonds, but now the U.S. is not just a debtor nation, but perhaps the greatest debtor nation the world has ever seen. The outcome from the issuance of "Obama bonds" won't be nearly as untroubled now as it was then.

You may recall that Joe, say it ain't so, Biden, and General Colin Powell have both knowingly suggested that Obama would be "tested" almost immediately upon assuming office. Neither of these characters were pressed on exactly what test they had in mind, since, as is their spineless and stupid wont, the media twits who were on hand when the two adumbrated of future peril, did not press messieurs Biden and Powell for particulars. But they must have some, since, short of being delusional, how can one be so sure of a coming event, yet have no idea what that event will entail? It's like asserting that there are bombs in, oh, say, Iraq, and then having no clue where the bombs are located? Please excuse me while I remove my tongue from my cheek.

Anyway, while it is tempting to imagine that perhaps there will a military challenge in the early days of Obama's Presidency, I am more of the mind that should there be "a test" ( heaven forfend of the emergency broadcasting system sort) it will more likely bear directly on U.S. finances. We will see.

P.S. I hear tell that Karl Denninger thinks that Yen denominated bonds would amount to the first step down the road to hyper-inflation.

I totally agree with Denninger's view; FOREX bonds are only necessary if the dollar is cratering. It allows a defacto default on existing debts without the unpleasantness of formal repudiation while still accessing the credit markets at manageable rates.

About Me

I was educated as a chemical engineer but spent almost my entire career in finance, particularly in money, FX and bond markets. The name stands for Hell-as-IOUs and the picture points to Quixotic endeavors.